Islamic Mode of Financing Salam l How Salam works ?

In any Islamic modes of financing institution how Salam works is defined below.

Definition and Concept

• Seller agrees to sell the commodity to the buyer at future date in exchange of the advanced price fully paid at spot.
• Price in cash but the delivery of goods is differed

Background of Salam

• Before prohibition of interest farmer used to get loans on interest based from usurers to grow their crops and harvesting.After prohibition of interest they were allowed to do Salam transactions.This helps them to get money in advance to fulfill their needs.
• During the days of our Prophet (S.W) the caravan used to get interest based loans for purchasing the commodities.After prohibition of interest they were allowed to do Salam.
  

Purpose of Salam

• To meet the needs of small farmers who need money to grow their crops and feed their family up to the time of harvest.
• To meet the need of working capital.
• To meet the need of traders for import and export business.
• If the client belongs to agricultural sector then Salam can be used.
• Under Salam the seller undertakes the supply of goods to the buyer at future date in exchange of advance price fully paid at spot.
• Price is in cash but the supply of goods is deferred.
• Farmer can sell their crops to bank in advance.
• After receiving their cash,farmer can easily undertake their work.
• This is beneficial for the farmer as he receives the price in advance and for the bank as well because the Salam price is lower then the spot price.

Conditions of Salam

1. It is necessary for the Salam that the buyer pays the price in full to the seller at the time of effecting sale,because the basic wisdom for allowing Salam is to fulfiill the instant need of the seller.
2. Only those goods can be sold through Salam in which quantity and quality can be exactly specified e.g. precious stone cannot be sold on the basis of Salam because each stone is differ in size,weight,quality and their exact specification is not possible.
3. All details in respect of quality of goods sold must be expressly specified leaving no ambiguity which may lead to a dispute.
4. It is necessary that the quantity of the commodity is agreed upon in absolute terms.It should be measured or weighted in its usual measure.
5. Salam cannot be effected on a particular commodity or on a product of particular field or farm e.g . supply of wheat of a particular field or the fruit of a particular tree since there is a possibility that the crop is destroyed before delivery and given such possibility,the delivery remains uncertain.
6. The exact date and place of delivery must be specified in the contract.
7. Salam cannot be effected in respect of things which must be delivered at spot e.g. Salam b/w wheat and barley.
8. The commodity of Salam contract should remain in the market right from the day of contract up to the date of delivery or at least at the date of delivery.
9. There should be actual delivery of commodity.

Benefits of Salam

Salam is the beneficial to the seller,because he receives the price in advance,and it is beneficial for the buyer also,because he receives lower price than the spot sale.   

These are the definitions and concepts of Salam how Islamic mode of Financing Salam works.

Risk involvement and mitigation in Murabaha Financing

Murabaha is a sale agreement where an islamic economic group (IFI) sells goods, commodities or belongings to a consumer on deferred fee basis.
Sharia requires an IFI to first acquire the name and possession to the goods/assets earlier than moving into murabaha with its client. This is surely because one cannot promote some thing which it does not own.
The IFI's full legal ownership and possession over the goods or belongings is accordingly a pre-requisite for stepping into a murabaha transaction with a customer.
The ownership to the murabaha items or belongings will be bodily or constructive as well. Through positive I suggest through a trustee. As an instance, in import of goods by means of deliver, the industrial bill is taken into consideration the identify report to the goods whereas the bill of lading (issued with the aid of the shipping enterprise) is the document for positive possession.
That is due to the fact the delivery organisation which, Owns the vessel is sporting the products for the importer inside the capability of its trustee, thereby establishing constructive ownership to the products by means of the importer.
As such, a murabaha transaction for the imported goods can not take vicinity unless the ifi establishes the letter of credit in its very own call as customer. This differentiates an IFI from
A conventional bank which establishes the letters of credit in consumer's call.
Once the name and possession to the products or assets is with the IFI, it is able to sell the same to the consumer by using way of murabaha at an agreed price and fee terms.
The murabaha sale rate will include IFI's profit agreed to by using the patron.
The IFI components with the title and possession to the goods or assets in favour of the patron at the time of entering into a murabaha transaction whereas the payment of the purchase charge with the aid of it to the IFI can be made in future.
Whilst assessing the risks an IFI encounters in a murabaha transaction, the primary thing which comes into thoughts is what recourse does it have on the murabaha items or property in case of default with the aid of the purchaser in making timely payment to the IFI.

In conventional phrases and as described by means of basel ii, you may term it as the credit score risk however due to the fact that there's no room for credit in sharia, we'd permit ourselves to term it as default threat.
Earlier than discussing the mitigation to the default threat in murabaha, it's far essential to notice that not like traditional banks where any default in well timed payment of LATR or any other debt at the purchaser is greeted with 3 layers of interest normal, compound and penal, an IFI is barred by way of the sharia to enhance its murabaha amount even by means of a penny in case of default through the customer.
The cause for such restrict is that murabaha is not a transaction of loan with interest but a hard and fast fee sale agreement which can not be altered even supposing the customer fails to accomplish its financial duty towards the vendor.

Islamic Modes of Financing

Islamic modes of  Financing is a Sharia compliant Financing based on no prohibition of financing,prohibition of Riba (Interest),Risk sharing,Materiality and Fairness / No exploitation.

Islamic Modes of Financing are defined as below:

• Musawamah    (Debt Base / Trade Based)
• Murabahah      (Debt Base / Trade Based)
• Salam              (Debt Base / Trade Based)
• Istisna'a           (Debt Base / Trade Based)
• Musharkah      (Equity Based)
• Mudarabah      (Equity Based)
• Ijarah               (Semi Debt Based)

Musawamah

In Musawamah goods are sold on a lump sum price without any reference to the cost.This type of sale can be called bargain sale.

Murabahah

A contract buyer and seller under which the seller sells certain specific goods to the buyer at a sale price based on cost plus agreed profit payable in cash or any fixed fixture date in lump sum or by instalments.The agreed profit may be fixed in lump sum or in a percentage of the cost price of the goods.

Salam

In salam the seller undertakes to deliver the goods at a future date against spot payment.

Istisna'a

Istisna is a contract based on an order given to the manufacturer of goods along-with some advance money for purchase after completion of manufacturing process.The remaining balance amount is given at the time of delivery of goods.  

Musharkah

Musharkah means relationship established under a contract by the mutual consent of the parties for sharing of profit and losses arising from a joint enterprise or venture.

Mudarbah

In this Islamic modes of financing a partnership is made where a partner gives money to another for investment in a commercial enterprise.The investment comes for the first partner (Rabb-ul-Mal),while the management and work is an exclusive responsibility of the other (Mudarib).

Ijarah

The Arabic term ijara means “providing services and goods temporarily for a wage.” The ijara contract, as you may guess, involves providing products or services on a lease or rental basis.

These were some Islamic modes of Financing.

Islamic Financing

Islamic Financing is an Islamic financing that is called Sharia Compliant Financing where a bank or any lending institution is abide by Sharia law (Quran and Sunnah).

Islamic finance features banks, capital markets, fund managers, investment firms, and insurance companies.

Advantages of Islamic Financing.

In islamic banking there is a loan or debt called Qard-el-Hassan is a good loan where issuer (bank) charges no additional loan over the principal.Islamic financing produce loan on the productivity of a project rather than criterion of Creditworthiness of those who owns project.There is no speculation and gambling in Islamic Finance.